Setting Up Next Week

Plus, Replace DNA with CELG

PLAY: Buy the CELG October 50 Calls (LQH JJ) at or under $4.50, good for the day.

Dear Bottarelli Research Member,

Let’s put a cap on this shortened trading week by setting our strategies for next week. But first and foremost, I’d like to quickly issue a new longer-term play.

As you know, we recently used a big upside move in Genentech (DNA — NYSE) to take our profits off the table. DNA is my favorite biotech stock, which is why I issued longer-term calls on two occasions as part of my “Aftermath Report.” We entered the DNA December 80 Calls (DWN LP) for an average entry price of $6.75. As of today, these calls have traded as high as $11.30. In fact, despite today’s 100-point drop on the Dow, DNA is up another 1% on the heels of their second-quarter earnings release next week.

According to estimates, DNA is expected to post a profit of $0.47 per share versus $0.30 per share last year. In terms of revenues, DNA is expected to report an increase to $2.12 billion from $1.53 billion last year.

As I noted earlier this week, I already recommended taking your profits off the table and selling your DNA December 80 calls. The rationale behind this was to lock in your profits — and avoid getting stung by a sell-off on the day earnings are released. I did receive some notes from some Charter Members who sold half of their calls, which was tactically a good move. But now that you’re looking at call prices north of $11.00, I’d consider taking the rest of your profits off the table.

“But wait a minute” I hear you say. “Isn’t biotech in a stealth market rally right now?”

Yes, biotech stocks are indeed experiencing a nice rally — and nobody’s really talking too much about it. So in order to stay positioned to the upside, I’d like to replace our former DNA pick with a new longer-term upside play on Celgene Corporation (CELG).

If you’ve been with me for a while, you know that I’m very bullish on Celgene. In fact, I’ve been waiting for a dip to enter into longer-term calls, but that dip has never materialized. So instead of fighting the tape, let’s just enter into calls — and like our DNA play — add to them on any significant dips. Here’s a quick review on why I’m bullish on CELG:

In May, Celgene won Food and Drug Administration approval to market a drug called Thalomid for newly diagnosed multiple myeloma patients.

In December, Celgene won FDA approval to sell a drug called Revlimid for patients with anemia caused by Myelodysplastic Syndromes, a condition that could eventually lead to cancer. Then, on June 29^th, Celgene won FDA permission to market Revlimid for multiple myeloma.

Based on all these FDA approvals, CELG is establishing a stronghold on their future earnings forecasts. The cost of CELG’s higher-dosed Revlimid pills will soon jump 30%. In fact, on June 30^th, the Wall Street Journal reported that Celgene could price their cancer medicine at $6,195 per month. This could help Celgene’s overall sales to climb 54% to $825 million this year. And that’s just the beginning. Next year, sales could reach $1.28 billion, and by 2008, sales could hit $1.62 billion. Now that’s what you call strong growth! Based on all this, I’d like to add longer-term calls on CELG to our trading ledger.

PLAY: Buy the CELG October 50 Calls (LQH JJ) at or under $4.50, good for the day. Current bid/ask spread is $4.10 to $4.30. Do not place a stop loss at this time, as I plan to add to the position on any dips.

Another upside sector play I’m considering comes in the form of the airlines. Now before you call me a nut-ball for considering playing the airline sector up, consider some recent facts.

First off, many of the top airline companies have managed to quietly initiate several lasting fare hikes that have offset the rising cost of fuel. In the past, the airlines have been unable to raise fares — simply because reduced airline traffic gave them absolutely zero pricing power. But now, traffic volumes are beginning to increase to levels that could finally change things for beleaguered carriers such as Continental, AMR, and JetBlue.

In fact, JetBlue Airways (JBLU – NASDAQ) just today gained 2.5% pre-market on the news that their June traffic rose 11.4%. This increased traffic is a good reason why Southwest Airlines (LUV – NYSE) announced on Wednesday their fourth price increase this year. These rate hikes are some of the largest Southwest has ever imposed — and they’re actually sticking!

Based on these facts, I think the airline sector could finally be moving in the right direction. That’s why it may be a good idea to make a cheap upside speculation using the AMEX Airline Index (XAL), which serves as a proxy for the whole sector.

Trading for $54.44, the XAL baskets together airline names like AMR, Frontier Airlines, JetBlue, and Southwest Airlines all into one liquid trading vehicle. If we get a good entry point on XAL calls, you can expect an upside speculative play in the near future.

Also making big news today is the sever drop in 3M (MMM – NYSE). As you can see by the chart, we could have a “downside gift gap” on our hands.

The 8.56% one-day drop has pushed MMM shares to their lowest levels since March 22^nd. The one-day hit is being credited to lower-than-expected sales and higher startup costs at 3M’s optical-film business. These unforeseen costs, according to the company, will make their second-quarter results come in at the low-end of expectations. Does this warrant such a drastic fall? Let’s take a look…

3M said their second-quarter sales would come in at $5.7 billion. The average analyst estimate was $5.71 million, so that’s pretty darn close. 3M also said that their earnings would come in somewhere between $1.14 to $1.17 a share. Thomson First Call expected earnings of $1.17 a share. Again, the number is off, but not by much.

When I look at a 3M chart, I think that shares could move down to $72.50 before finding support. If the stock moves just $2.00 lower and finds support, we would have been handed a gift. I’d look to buy three-month upside calls right around the $72.50 level. Stay tuned for a possible trade next week.

Also raising an eyebrow today is NASDAQ darling Apple Computer (AAPL – NASDAQ), simply due to the stock breaking below its recent support point at $57.50. As you probably know, I’m bearish on technology — as we’ve made good money playing put options on Dell, Intel, eBay, and even the Amex Internet Holders (HHH). Up until this point, I’ve shied away from Apple due to its out-performance in the tech sector, but now the tables could be turning.

A drop in flash memory prices could delay Apple’s 6 Gigabyte and 8 Gigabyte nano until November. Not only that, but now Microsoft has decided to build its own portable music and video player to take on the iPod. A possible put play on Apple could be in the works for next week.

Zebra Technologies (ZBRA – NASDAQ) is another company showing continued signs of weakness. Without question, RFID and bar-coding are both great technologies, but ZBRA has consistently disappointed investors. The company has an earnings call scheduled for July 26^th, so we’ll watch the stock for more weakness leading up to this call.

In terms of our current positions, I’m still comfortable with all of our holdings — so we’ll look to take profits on anything that offers us the chance next week. In the meantime, have a good weekend. And as always…

Lock and load!

Sincerely,